The Leather Pipeline - 9.1.18
10/01/2018
After the break for Christmas we would like to wish all our readers a very happy, healthy and prosperous New Year! Let’s hope that you all will continue to follow our analysis of the Leather Pipeline and enjoy the sometimes a little provocative and alternative market views.
The New Year starts as the old one ended. About 10 years after the start of the financial crisis it seems that the private sector continues the party with low interest rates, strong labour markets and rising income and profits.
There have been numerous important political events that have had global repercussions: North Korean leader Kim Jong-un’s clashes with US President Donald Trump, the riots in Iran, Brexit negotiations, independence struggles in Catalunya, the conflict on the Arabian Peninsula and in the Ukraine, the unresolved refugee crisis and the strengthening of Russia and China.
Political events are reflected the market in terms of a weak US dollar and a firm price for oil. If Mr Trump’s intention was to use Twitter to weaken the – in his view – overvalued dollar he was successful. Last year, the US dollar lost 10% against the euro and 5.5% against the renminbi, despite higher interest rates and the US Federal Reserve System indicating they will rise further. The European Central Bank made it clear it is unlikely to raise rates, and this should have strengthened the dollar, but the markets have taken a different view.
The oil price has increased over the past year. After an extended dip in mid-summer, it headed up, but this was not pronounced in most importing countries due to the fall of the US dollar. However, the price for oil has gone up by more than $10 per barrel from early 2017 and more than doubled since early 2016.
Most pundits believe that 2018 will just continue the trends of last year. Pundits recommend further investment in stocks, expect low interest rates and a strong economic performance – but they are not always to be believed.
Market Intelligence
Despite the different holiday celebrations, the period over Christmas and the New Year is generally regarded as low season with little activity around the globe. Although Chinese New Year is celebrated in February, they also take the opportunity to change to a low gear. Production continues, but generally falls in line with the rest of the world.
However, the breaks are not just connected to the holidays. For many companies, the end of the calendar year corresponds with the end of the fiscal year, which means management are busy with the end-of-year operations. This sometimes means finance departments have increased influence over business decisions, which affects inventory management, in particular.
The Christmas holiday season is always more of a break than the summer holidays, and we have come to the conclusion that the winddown is getting more pronounced each year.
Tanneries closed, and were due to reopen on January 2 or 8. In Europe, most were active right after New Year. This is not really a surprise, because the leather industry in Europe has been performing much better than in the rest of the world. Most quality tanners are running full order books and had no reason to shut down any longer.
In Asia, the situation is different. Most Asian operations are preparing for their break for their New Year holidays. The official holidays start in mid-February, but a good number of tanners have already announced they are going to wind down from mid-January to take a longer break of almost three to four weeks due to a lack of orders.
There were many changes in the leather pipeline last year. Since it takes six to nine months until any kind of changes are reflected along the supply chain, situations that loomed in 2016 materialised last year. Generally, the leather pipeline is not as uniform as it used to be. Previously, everything was connected and changes in one sector a direct effect on the others.
Leather substituting was mainly based on price. It is now obvious that leather has lost its leading position as the basic material for shoe production. Microfibres and all other kinds of plastic-based substitutes have performance well and the consumer isn’t complaining. They buy it because it’s fashion and the industry offers it because it’s easier to manufacture and offers better margins.
We saw good performance for leather in the automotive industry, where it was riding the wave of strong demand and rising production. However, behind the scenes the industry is discussing how and where leather can be substituted. Leather will remain a premium product for the luxury end and add a superior feel to certain models. Within the mid-price model ranges it is changing, because the specific functionality of leather in certain models can be easily substituted by artificial materials.
Another sector where the consumption of leather is rising is for phones and computers. A lot of sleeves and covers are made from high quality leather. This might be surprising, but haptic or ‘touch’ is still one of the prime characters of good quality leather and an area where the material is unbeaten. However, the leather is not particularly promoted in the sector – its qualities are not touted to add a luxury feel, and we are not sure if this is intentional or not.
Remaining with raw material supply, one could not ignore the news about several pilot plants producing artificial skin. However, if leather continues to retreat it is difficult to understand why you should use an artificial copy when there is abundant supply of the original. As long as beef is consumed, its byproduct will be available. For the foreseeable future, the slaughter of animals to satisfy the demand for protein will continue and so the best use of the byproduct continues to be the production of a sustainable material, leather.
In the leather industry, manufacturers and retailers remain in defensive mode. New certifications are launched to react to animal welfare, tracebility, ‘green’ ideas or whatever the welfare organisations are pushing. The industry is basically offering excuses instead of focusing on the fact that high standards are prevalent from the farm to finished product. We may still have to take note of the last 5% or 10%, but that means 90% to 95% are produced at more than acceptable levels.
In the past weeks, plastic waste once again made headlines. The oceans are polluted and it gets worse every day. It is not just the plastic bags, but all kinds of plastic waste either dumped directly into the environment or indirectly, because microfibres are washed out and discharged into waste water. As lifecycles of garments and shoes are getting lower, we are producing more of this pollution. China has stopped the import of low-grade plastic waste for recycling and this has presented Europe in particular with a headache. Plastic in all its variances is omnipresent. The use of more leather will not solve the problem but it is unacceptable that a sustainable material is constantly under attack and used as a tool by various organisations for their ideological and political ideas. The constant uncritical obedience by the industry to every request will, in our opinion, not serve us well.
The leather industry has undergone a long and successful period of change. It is still not perfect, but it is definitely more advanced than many others. It is not seen as a core industry, so can come under government scrutiny, for instance in China where the leather industry has become a target while the steel or energy sectors benefit from more tolerance.
A number of automotive companies are pushing their suppliers to guarantee animal welfare standards of the leather. They mainly ask their European suppliers, which mainly use high-quality raw materials deriving from European farms and slaughterhouses.
For the current year the challenges are clear: leather prices need to be stabilised and leather demand has to be supported to stop the decline of production capacity. The forecast of slaughter and supply of raw material is positive for 2018 and we have a good supply potential of splits for the leather industry. So we need to turn the consumer opinion around and reshape the image of leather. We have good arguments in hand, but have to use them proactively.
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